Balancing Risk and Efficiency at a 

Balancing Risk and Efficiency at a

Major Commercial Bank †

Erkut Sonmez
Sunder Kekre, Nicola Secomandi, Kenneth West
Tepper School of Business, Carnegie Mellon University

Quantitative Models for Production and Communication Networks 
Workshop 
2009
† Forthcoming at M&SOM
 Outline

• Industry Background
• Field Study
Field Study
• Model
• Modeling insights
• Managerial Insights
Managerial Insights
• Conclusions

2
 Industry Background
y g
1. Merchant

C stomer
Customer

3 Clearing House
3. Clearing House
2. Financial Institution 
4. Financial Institution  of Merchant
of Customer Journey of a paper check
3
 Decreasing Check Volume
g

ACH
Debit Cards

Credit Cards

Paper Checks
Paper Checks

Check clearing institutions need to adjust their workforce levels via layoffs

Source: Dove Consulting 4
 Field Studyy

Major Commercial Bank (CB)

Helped CB to determine new check processing workforce level and 
deployment

5
Efficiency / Risk Tradeoff
y

Efficiency Risk Caused by 

C db
•Wages • Float Cost processing 
• Fraud Cost 
Fraud Cost delays

6
 Our Contributions

• Modeled tradeoff at the check clearing house
d l d d ff h h k l i h

• Conducted
Conducted model
model‐based
based analysis on real clearing 
analysis on real clearing
house data.

• Ch
Check clearing house implemented our 
k l i h i l d
recommendations.

7
 Noveltyy

• Business problem level
i bl l l
– Consider all relevant costs
– Consider heterogeneity among check
– Model detailed system and cost of risk
– See Gomes and Meile (2002) for review of papers in 
check processing industry

• Methodological line of attack
– Use of simulation‐optimization (SO) methodology 
coupled with lower bound (LB) analysis on real data

8
 Check Clearing House Operations
Check Processing Workflow
Check Processing Workflow Check Types and Deadlines
Check Types and Deadlines
• Check Types :
– On
On‐us            
us
Receiving Sorting Check
– Transit Heterogeneity
• Kill
Settlement
• Re‐handle
1%
1%

Reject‐ Dispatch
Encodingg • Different Deadlines:
Repair
– Dispatch Deadline
– Settlement Deadline

9
 Data Analysis
Work‐Streams:
Data: check profiles, labor 
resources historical fraud patterns
resources, historical fraud patterns. • Different check dollar value, 
Different check dollar value,
volume, fraud probability, arrival 
time, deadlines

WORKSTREAMS SCALED CHECK VALUE

WS2

WS3

WORKSTREAMS
10
 Model

Stochastic Integer Program Simulation‐Optimization

min E[ W
Workforce
f ( ) + Risk C
Cost(X)
C Cost ((X))]
ARENA
X

s.t.
S i Level
Service L l Constraint
C t i ts ( X )

Opt  ‐
Quest

11
 Modeling Insights
g g
• Quality of OptQuest solution
– Obtain a LB by solving a MIP that ignores workflow 
sequencing constraints and uncertainty 
– MIP solution (LB) is 6.1% lower than QptQuest
MIP solution (LB) is 6 1% lower than QptQuest
solution in terms total expected cost

• Simulating MIP solution
– 61% higher than OptQuest
g solution in terms of total 
expected cost

• Relevance of modeling uncertainty : deterministic 
l f d li i d i i i
simulation
– %2
%2.5 higher than stochastic model in terms of total 
5 hi h th t h ti d li t ft t l
expected cost 12
 Managerial Concerns
g

• What is the sensitivity of expected costs to 
h i h ii i f d
workforce level changes?

• What should a good worker‐to‐shift assignment 
policy look like?
policy look like?

• What are the benefits of cross‐training?

13
Sensitivity of Expected Cost to Workforce Level

Scaled Expected Cost • Firing too many can

be too costly

• B
Being
i conservative
i
and having more than
adequate capacity is
TOTAL far better than lacking
capacity.

Workforce Level
14
Worker‐to‐Shift Assignment Policies
Risk Potentials by Shift

15
Worker‐to‐Shift Assignment Policies
g
Number of Workers
Number of Workers Cost

A good assignment policy should consider all risk 
A good assignment policy should consider all risk
potentials and check volumes
16
 Benefits of Cross‐Training
Total Expected Cost
p

Cost reduction
is 9.83% in
moving from
point A to B
A
B

Cross‐training is most valuable for workforce levels that 
Cross‐training is most valuable for workforce levels that
fall in between overload and excess capacity situations 17
 Conclusions
• Conducted model‐based analysis at a major commercial bank

• Recommendations implemented

• Managerial Insights:
– Firing too many workers too early can be very costly
– A good worker‐to‐shift assignment policy should consider
two major
j criteria: check volume and risk p potential
– Cross training can lead to significant cost reductions if it is
introduced at the right capacity bands

• Insights are relevant for other companies that face processing

delay contingent liabilities: service providers(insurance
companies), contract manufacturers 18
 THANKS!
QUESTIONS ?
COMMENTS!

Erkut Sonmez
Tepper School of Business
esonmez@andrew.cmu.edu
@ d d